With eyes wide open

South Asia, which constitutes one-fifth of the global population, has been receiving minimal foreign investment, despite administering steady economic reforms and opening up to global investors. It received 0.2 percent of the global foreign direct investment in 2000; 1.06 percent in 2005 and 1 .76 percent in 2012. As of late, it has started attracting over 3 percent of the global total investment of $ 1,430 billion. India continues to attract an overwhelming share of almost $40 billion or 85 percent of the total investment flows in the region.

In macro-level national engagement with South Asian countries, China has been effectively using investment in multiple sectors as a key economic instrument. On the other hand, a gigantic $60 billion project like ‘China Pakistan Economic Corridor’ as one of the flagship projects under its ‘Belt and Road Initiative’ represents a new approach to intervention in this region. The two-way investment links between India and China are deepening. According to the Reserve Bank of India Annual Report 2017-2018, during the last five years 2013-14 to 2017-18, India received a total of $2.82 billion from China, which constituted hardly 1.88 percent of the total FDI inflows ($150.5 billion) into India. Pakistan’s Board of Investment states that it has recorded a steady rise in Chinese investment, which constituted almost 60 percent of its total investment receipts in 2017-18. In the course of just six years, its investment jumped by almost 14 fold to $1.8 billion.

Nepal Rastra Bank recorded in 2018 that China constituted the third largest investment in Nepal, with Rs. 10.8 billion, after West Indies, with Rs 62.8 billion and India, with 27.3 billion.

Similarly, in Bangladesh, Chinese investment has steadily increased, constituting over 79 percent of the total foreign investment in 2013-14. The number of Chinese projects stood at 21 in 2014. However, till then China never appeared in the top ten investors in Bangladesh. It is only after the visit of the Chinese President and his announcement to invest over $20 billion in 2016, a significant number of large-scale projects have overwhelmed Bangladesh. By 2013, China had also emerged as the top source of foreign investment in Sri

Lanka, constituting 17 percent of the total investment.

Enslavement Hypothesis

Chinese investment activities have sharply increased in Maldives despite severe constraints like the lack of effective convertibility of the rufiyaa, its weak sovereign rating, the fragile capacity of the private sector and lack of skilled workers. Issues concerning India’s approach to ocean security, shortage of land and the potential for ‘enslavement’ regarding investment relationships have also been raised.

China gained a strong advantage from the July 2015 constitutional amendment and foreign investment norms in Maldives. The new legislation removed restrictions on foreign freehold land ownership, allowing any foreign parties willing to invest USD 1 billion in large development projects to purchase land. China has shown its skills in land reclamation on several occasions, the latest being in the South China Sea and also in Sri Lanka. China has been trying to negotiate strategic alliances with some major firms in South Asia and also expand on their Merger and acquisition operations in the continent.

Pakistan has become the hub of Chinese investment. A $37 million investment in zinc and lead exploration and mineral development in Balochistan Lasbela district made by Meteorological Construction Corporation, a Chinese entreprise firm, is indicative of China’s quiet but steady foray into the raw material reservoirs of Pakistan. However, the biggest Chinese investment has been in the Gwadar deep seaport on the Balochistan coast. The port is now directly connected to the Xinjiang province of China through the Karakoram Highway that came into operation in the 1980s. China’s access to Bay of Bengal through Myanmar provides it with another form of vertical access—from the mountains to the sea.

Contentious Directions

Despite China triggering the development of far-reaching infrastructure projects, many issues have been raised on Chinese investment in South Asia. These include i) harsh loan conditions, ii) inflating the project costs, iii) no transparency in both negotiation and final implementation of projects, iv) hobnobbing with the ruling regime and the domestic politics, v) creating excess capacities that become burdens on these economies. Some of these are speculative, sometimes driven by forces that control and construct global discourse, and are not found in any of the government reports including that of their Central Banks. The emergence of debt-ridden economies in South Asia is one of them. Though there are intense political debates and high sounding statements on apprehensions around whether or not these investment relationships could affect the sovereignty of some of these countries and propel them into a ‘debt trap to hook countries into China’s sphere’, the discourse is shaping to be one-sided, hegemonic and generally raised by political opposition groups in these countries. At the same time, studies reveal that the debt traps leading to severe distress, including that of livelihood, are inevitable. For instance, think tanks including US-based Centre for Global Development provide vivid illustrations capturing how China adds to the debt burden of some South Asian countries. China, however, states that the ‘partnership is open, inclusive and transparent’, and mentions that ‘The total cost of China-Maldives Friendship Bridge is 1.26 billion RMB (US$224.2 million) and 57.5 percent of the cost is granted by the Chinese government, 36.1 percent is preferential loan from Chinese government and 6.4 percent is from the Maldivian side.’

There are apprehensions that these extensive investments could, in turn, lead to manipulations in the policy-making process. A Gateway House report released in 2018 maintained that ‘The political crisis in the Maldives shows that large-scale Chinese investments can undermine democratic institutions. For India, this is a warning that Chinese investments in South Asian nations can alter India’s geopolitics by manipulating latent, unresolved

hostilities.’

Loan Conditionality

However, both India and China have now tended to seek staggering and sophisticated projects in order to incur huge investments. Traditional assistance measures like grants and soft loans are giving way to loans with much more harsher conditionalities. These lending conditions are sometimes much more unfavourable than offers from traditional institutions including the World Bank and the Asian Development Bank. However, they are attractive enough as they are bilateral in character and are easier to negotiate and quicker in terms of their utility and operationalisation.

Apprehensions about China’s conditionality in their investments received global attention after seaport and airport facilities in Sri Lanka remained literally unutilised and were effectively taken over by China on a long-term lease, fueling further debates on ‘debt traps’ and ‘debt book diplomacy’. In the absence of accurate and well-disseminated public information on this conditionality, there is plenty speculation This is possibly the reason why the newly elected Prime Minister Imran Khan approached the IMF for a bail-out package, the latter asked it to lay out ‘absolute transparency about the nature, size, terms of the debt that is bearing on’ Pakistan including that it agreed to in the CPEC projects.

Lama is a senior Professor in Jawaharlal Nehru University, New Delhi and co-author of India- China : Rethinking Borders and Security.